We present near-infrared spectroscopy and imaging of the compact steep-spectrum radio source 3C 318, which shows it to be a quasar at redshift z=1.574 (the z=0.752 value previously reported is incorrect). 3C 318 is an IRAS, ISO and SCUBA source so its new redshift makes it the most intrinsically luminous far-infrared (FIR) source in the 3C catalogue (there is no evidence of strong gravitational lensing effects). Its bolometric luminosity greatly exceeds the 1013Lsolar level above which an object is said to be hyperluminous. Its spectral energy distribution (SED) requires that the quasar heats the dust responsible for the FIR flux, as is believed to be the case in other hyperluminous galaxies, and contributes (at the >10per cent level) to the heating of the dust responsible for the submm emission. We cannot determine whether a starburst makes an important contribution to the heating of the coolest dust, so evidence for a high star formation rate is circumstantial, being based on the high dust, and hence gas, mass required by its submm detection. We show that the current submm and FIR data available for the highest-redshift radio galaxies are consistent with SEDs similar to that of 3C 318. This indicates that at least some of this population may be detected in the submm because of dust heated by the quasar nucleus, and that interpreting submm detection as evidence for very high (>~1000Msolaryr-1) star formation rates may not always be valid. We show that the 3C 318 quasar is slightly reddened (AV~0.5), the most likely cause of which is SMC-type dust in the host galaxy. If very distant radio galaxies are reddened in a similar way then we show that only slightly greater amounts of dust could obscure the quasars in these sources. We speculate that the low fraction of quasars amongst the very high redshift (z>~3) objects in low-frequency radio-selected samples is the result of such obscuration. The highest-z objects might be preferentially obscured because like 3C 318 they are inevitably observed very shortly after the jet-triggering event, or because their host galaxies are richer in dust and gas at earlier cosmic epochs, or because of some combination of these two effects.